The great unwritten rule of family businesses is that the wheels come off with the third generation. The theory is that after the first two generations, the third feels that success is a birthright and falls into complacency. That's the rule. But is it the reality?
Rob Slee, author of Time Really Is Money, points to a US study from the 1980s, where the Family Firm Institute found that about 30% of family-owned businesses survived into the second generation; about 12% were still going in the third; but barely 3% made it to the fourth generation and beyond. "I checked a couple of dozen websites of business succession advisers, and each quoted the FFI statistics as if they applied today," Slee writes. "I don't think they do. In fact, at least for the middle market, I'd be shocked if more than 10% of family businesses are now transferring to the second generation."
Closer to home, PwC's Africa NextGen Survey 2022 found that 50% of the next generation believed their family business had a succession plan — significantly up from the 24% who said so in PwC's 2021 Africa Family Business survey. The survey found that 64% of the SA next-generation business owners are already in a leadership role, with 36% wanting to play an intrapreneurial role in the next five years.
Part of the challenge lies in business owners simply not wanting to let go. Slee shares the example of an 85-year-old entrepreneur who sought his firm's help to effect an inter-generational business transfer. "The man was distraught because Junior had recently been offered the chance to buy the family business but had declined the opportunity." He later discovered that Junior was 62 years old and had worked in the business for more than 30 years.
Our focus is to help entrepreneurs formalise and rationalise partnership agreements and align remuneration expectations from family members according to their contribution to the success of the business, rather than as a result of the family connection.
In a recent opinion piece, Tiaan Herbst of the Southern African Advisory Company cited the Rupert family's Reinet Investments as an excellent example of how to run a family business professionally and responsibly. "Their board of directors includes both family and non-family members, ensuring that the company is run with an objective and unbiased approach," writes Herbst. "Small-business owners can learn from Reinet Investments' example by adopting effective governance practices and establishing clear policies and procedures."
"By creating a culture of professionalism and responsibility, businesses can avoid bad judgement, weak leadership and a refusal to take responsibility." That culture of professionalism can also help reduce the frictions and squabbles that so often come from running a business alongside one's parents, siblings and children.
Succession planning is not something that happens overnight. Small businesses often revolve around the skills and passions of the founder, and these are seldom found in others — let alone their own children. The recommendation is to combine the family's vested interest and innate insights with an outsider's arms-length professionalism, building a cross-cutting team of capable staff to ensure professional management that is not swayed by family emotions.
